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Form

P . R. 5 1 1

T0

Mr. P i s e r

?ROM

Chairman Eccles

REMARKS:

In accordance with telephone conversation
just had with you, I will appreciate your
having copies made of the attached letter
and memorandum received this morning f rom
Mr. Sproul, delivering them to the members
of the Committee and others who should be
furnished copies.
Kindly return Mr. Sproul's letter to me
for my use.

CHAIRMAN'S OFFICE



COPY

FEDERAL RESERVE BANK
OF NEXT YORK
April 25,

Hon. M. S. Eccles, Chairman,
Federal Open Market Committee,
Washington 25, D. C#
Dear Marriner:
We have gone over Mr* Piserfs latest draft of the supplementary memorandum on Treasury bills, which reached me today, and I am sending you
another draft embodying our ideas, including enough copies for the other
members of the Executive Committee at the Board. I have also sent a copy
to Hugh Leach,
We suggest again that the issues of bills of the two maturities be in
approximately fixed amounts, this to be achieved by having the Federal Reserve
Banks purchase a fixed amount of new 3<rnionths bills each week. There are
really three possibilities:
1. Weekly issues of bills fluctuating in total amount as maturities
fluctuate•
2.

Weekly issues of b i l l s regular in total amount but fluctuating as
to the proportion of 3-nionths and 5-i&°*rkks b i l l s issued in
accordance with the varying tenders for 3-^onths and 5-aionths
bills.

3.

Weekly issues of b i l l s regular in total amount and approximately
regular in the proportion of 3-raonths and 5-*nonths b i l l s issued*

It seems to us that the latter method has much the better chance of being
accepted by the Treasury (if a l l these proposals are not too complicated for
the Treasury), because i t has much the better chance of favorable public
acceptance. It would be hard for the market to understand either a widely
fluctuating total weekly issue of b i l l s , or a widely fluctuating distribution
of 5-EK>nths and 3-<raonths issues, which had no logical relation either to the
Treasury's need for money nor the market's need for funds* This is wholly
aside from the question of whether the Treasury could adjust i t s position
through changes in i t s balances or use of special certificates of indebtedness, or whether the market could adjust its position through the use of
Treasury b i l l option accounts• I agree that both types of adjustment are
possible•
We have also retained the 3/8 of 1% buying rate and repurchase option.
It seems to us that an important part of our selling argument with the
Treasury is the maintenance of the appearance of a 3/8 of 1% rate at the




-. 2 ~

lower end of the rate pattern, and we are not aware of any offsetting advantage^ to be obtained by abandonment of this rate after 3 months, even
though it will not have much meaning•
Yours sincerely,
(Signed) Allan Sproul
Allan Sproul, Vice Chairman,
Federal Open Market Committee•

P, S.
Incidentally, I still think the amount of possible fluctuations in
maturities could be substantially larger than |200 million. That
was the maximum figure on the basis of our bill holdings when Mr*
Piser calculated it a week or sc ago* On the basis of yesterday's
holdings, I think the maximum fluctuation could be about 1325
million. As we went forward, this maximum could well reach the
1500 million figure I mentioned as a theoretical possibility*
A* S«
Encs.




SUPPLEMENTARY RECCM^ENDATION
BY THE EXECUTIVE COMMITTEE OP T.HE FEDERAL OPEN MARKET COMMITTEE
TO THE SECRETARY OF THE TREASURY
In our memorandum of March 29, 19i^» we recommended that the rate
on Treasury bills be increased to l/2 of 1% and the maturity extended to I4.
months. At the meeting of our representatives with you, concern was expressed
by your associates as to the effect on the whole interest rate structure of
the abandonment of the 3/8 of 1% rate. At the same time, our representatives
referred to the fact that an increase in rate would mean an increase in
earnings on the large holdings of bills by the System and expressed the
view that, while this circumstance should not be a determinant of financing
policy, ways could be devised to overcome it, if necessary.
Renewed consideration of our recommendation has further convinced
us that it is sound in principle. Renewed consideration of the Treasury's
views has suggested an adaptation of our proposal that should make it
acceptable without detracting essentially from its advantages. In brief,
we now propose that there be two issues of Treasury bills, one of 3-numths
maturity which would be largely, if not wholly, taken by the Federal Reserve
Banks, and one of 5~nionths maturity which would achieve the wider distribution we seek in the market. To make this proposal effective, we would
re com end:
1.

The Treasury plan to raise funds between drives largely by
means of 5-m°nths bills instead of certificates of indebtedness or longer term securities•

2.

The Federal Open Market Committee direct the Federal Reserve
Banks to establish a buying rate of 5/8 of 1% and a repurchase
option on the new bills.

3#

The Federal Open Market Committee direct the Federal Reserve
Banks to purchase each week a fixed amount of new 3-nionths
bills, and to maintain the present buying and repurchase
rate of 3/3 of 1% on such bills, the rate being maintained
initially to protect existing holders and subsequently to
avoid its disappearance from the market.




This proposal has the following advantages 1
a* While maintaining its weekly bill offerings at $1 billion,
the Treasury would be able to obtain a substantial
amount of new money (|U»5 billion) through sales of
bills* When additional direct financing is necessary,
the amount of the weekly bill offerings could be
increased.
b.

The rate on the new 5-roonths bills would be in line with
the present pattern of rates as indicated by the market
for certificates of indebtedness that mature in 5 months,
but the difficult task of maintaining a market pattern
between 3/8 and 7/9 of 1% would be relieved in considerable measure.

— 2 ~
c#

The net cost to the Treasury would probably be no larger,
and might be less than if the financing were done partly
with 3/8 of 1% bills and partly with 7/B of 1% certificates or higher rate securities. To the extent that the
higher rate bills proved attractive to nonbank investors,
so that they could be used to reduce materially the amount
of Treasury financing to be done indirectly through the
banks, the net cost of the Treasury1 s borrowing would
be less than under the present program*

d.

It would reduce, if it did not wholly avoid, the offering
of certificates of indebtedness between drives. An
offering of certificates requires a special announcement
that calls attention to direct bank financing and is an
indication that the Treasury has not obtained sufficient
funds from nonbank investors. An offering of certificates,
moreover, involves problems of handling subscriptions and
making allotments, and necessitates annual refunding
offerings. An offering of bills, however, is more or less
routine and can be used to provide whatever amount of
residual financing is needed and whenever it is needed.

e.

Treasury bills would regain some of the character of market
obligations, whereas now they are tending to become almost
solely a medium for Federal Reserve financing. Banks are
now keeping their holdings of 3-nicmths bills at low levels,
because of the unattractive rate, and are purchasing certificates for their shortest term investments. The higher
rate on bills would result in an increase in commercial
bank buying and holding of bills and would encourage banks
to meet fluctuations in reserves through changes in their
bill portfolios rather than through buying and selling
certificates, notes and bonds.

f • More important, there would also be an increase in the buying
and holding of bills by business concerns which are now
holding large amounts of cash on deposit with banks.
Since bills are as liquid as deposits, business concerns
could reduce their deposits substantially and meet some
of their fluctuating needs for cash by changes in their
bill holdings rather than through bank deposits. By this
process, the amount of nonbank investment in Government
securities would be increased, and the amount of necessary
bank financing would be reduced.
Under this program the Treasury would offer a fixed amount of bills
each week, including, say $500 million J-months bills and $500 million
5-months bills. The Federal Reserve Banks would buy a fixed amount of 3months bills each week, the market would know the amount of 5-*&onths bills
for which it was bidding, and fluctuations in weekly maturities would be
avoided.
It is suggested that these recommendations be put into effect as
soon as possible so that they will immediately become a part of the Treasury's
financing program for the remainder of the year.
April 25,